Financial planners in limbo after health care ruling

Supreme Court Chief Justice John Roberts Jr. not only stunned Washington last month by siding with the court’s liberal wing in upholding the massive health care reform law, he also made the so-called “fiscal cliff” steeper.

In a 5-4 decision, the Roberts-led majority ruled that Congress has the power to penalize individuals who don’t purchase health insurance. The court defined the penalty for forgoing coverage as a tax, which is well within Congress’ constitutional authority to impose.

Some of the other taxes in the health care law directly affect the high-net-worth clients of financial advisers. On Jan. 1, individuals making more than $200,000 annually and couples making more than $250,000 will see a 0.9% increase in their income taxes and a 3.8% tax on investment income above the earnings thresholds to support Medicare.

So far, not a lot of attention has been paid to these tax increases, but they could be the source of much alarm if they get caught up in the fiscal cliff — the term used to describe the results of a number of already mandated tax and spending measures that are to take effect Jan. 1 unless post-election congressional negotiations soften the blow. They include the scheduled expiration of the Bush tax cuts, defense spending sequestrations, the debt limit ceiling and other issues.

“The court’s decision adds to the challenges that Congress will face at year-end,” Clint Stretch, a former legislation counsel to the congressional Joint Committee on Taxation, wrote in an e-mail. “Conservatives [had] been oddly quiet about [the Medicare] tax, perhaps hoping the court would repeal it for them.”

The ruling leaves many financial advisers and planners looking ahead to the post-election lame duck session of Congress with no idea of what is going to happen with many tax rates and other policies.

“December is going to be a helluva month for all financial planners,” said Carolyn McClanahan, founder of Life Planning Partners Inc. “They’re probably going to let us know something on Dec. 30.”

In the meantime, David Mendels, director of planning at Creative Financial Concepts LLC, is getting fed up with the uncertainty surrounding tax policy.

He isn’t making long-range projections about tax rates part of his portfolio development, though he still is ensuring that some portion of them are comprised of tax-free elements.

“Tax uncertainty is so certain that, broadly speaking, I don’t take tax changes into account,” said Mr. Mendels, chairman of the New York chapter of the Financial Planning Association.

The uncertainty also is wreaking havoc on planning by small business owners, who often make decisions based on five- or 10-year timetables for adding workers and buying equipment.

“At best, it has everyone in a holding pattern,” said E. Michael McGervey, president of McGervey Wealth Management LLC. “It’s the last thing we need at a time when our economy is struggling to grow. These uncertainties and disincentives are hammering folks who are creating the jobs.”

Clients are similarly hamstrung, according to Mr. McGervey.

Investors “are still very confused about what it means to them in terms of the risks and uncertainty in addition to the [inherent] risks of their underlying investment,” Mr. McGervey said.

Conservatives were aghast on last month that Mr. Roberts didn’t give them the defeat of the Affordable Care Act that they sought. Now, they’ll have at least one more item – the Medicare tax on investment income — on the fiscal-cliff negotiating table.

Curtis Dubay, a senior tax policy analyst at the Heritage Foundation, estimates that a tax increase totaling $494 billion would go into effect in January if Congress goes over the cliff, failing to extend the Bush administration tax cuts and allowing the health-care tax increases to stand.

Threats to repeal law

Allowing the tax hikes to come to fruition would hurt small businesses, which are critical to the economy, according to Mr. Dubay.

“We are in no position to be thwarting job creation, not with 13 million people out of work,” Mr. Dubay said. “There should be interest on Capitol Hill in delaying the [health care] tax.”

Even if legislators want to try to overturn the health-care levy, they have a big obstacle to overcome – the law has withstood a Supreme Court challenge and remains in place.

The presumptive GOP presidential nominee, former Massachusetts Gov. Mitt Romney, has vowed to overturn the law if he wins in November. He said it would raise taxes by about $500 billion and destroy jobs.

“What the court did not do on its last day in session, I will do on my first day if elected President of the United States,” Mr. Romney said shortly after the court issued its ruling. “And that is, I will act to repeal Obamacare.”

Although those words may find their way into a campaign commercial, Mr. Romney also has given President Barack Obama some cover in the health care debate by stumbling over whether he agrees with the Supreme Court that the coverage penalty is a tax. A spokesman for Mr. Romney indicated initially that the candidate did not view the penalty as a tax, putting Mr. Romney at odds with fellow Republicans who are labeling health-care reform as a massive tax increase in the wake of the Supreme Court decision.

Mr. Romney, in a television interview last week, however, confirmed that he does consider the coverage penalty a tax. His stance is complicated by the fact that Massachusetts enacted health care reform with a similar penalty while he was governor.

The battle over health care semantics may not mean much when it comes to health care politics. The law is bulletproof in Congress this year. The Republican-led House is scheduled to vote July 11 on a bill repealing it, but that bill will be ignored by the Democratic-majority Senate.

And Next year, even if Republicans take over the Senate, they’re unlikely to have the filibuster-proof majority that Mr. Romney would need to overturn the health care law, assuming he’s in the White House. Now that the coverage penalty has been defined as a tax, Republicans have indicated they may pursue repeal through a process known as budget reconciliation, which pertains to tax policy and requires a simple majority.

Before they get to that step, however, lawmakers will have to negotiate the fiscal cliff. Mr. Mendels said that the Medicare tax is the least vexing of the cliff issues.

“It’s minor compared with what they’re going to do with the capital gains and dividend rates,” Mr. Mendels said. “But it all adds up.”

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